Beta
A measure of a stock's systematic risk — the sensitivity of its returns to broad market returns.
The exam’s favorite computation is beta as Cov(asset, market) ÷ Var(market), which equals the correlation times the ratio of standard deviations (ρ × σ_asset ÷ σ_market) — recognizing these are the same number is the tested skill. A frequent twist: a stock with higher total volatility than another can have a lower beta if its correlation with the market is low, because only the systematic portion drives beta. Expect plug-in CAPM problems where you compute required return, then judge over- or undervaluation — forecast return above the required return means undervalued (it plots above the SML).
The classic trap is conflating beta with volatility: volatility (standard deviation) is total standalone risk, whereas beta is a relative measure that strips out diversifiable risk. Don’t confuse beta with liquidity either — a high-beta stock can be perfectly liquid; liquidity is a bid-ask/depth dimension, not market sensitivity. Memory hook: beta is “how much you bounce when the market bounces” — a leveraged tracking of the index, not your jitteriness on your own.
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